Supervalu looks to Save-A-Lot banner for growth

MINNEAPOLIS — There were three takeaways to come out of Supervalu’s third-quarter analyst call Tuesday morning: The deep discount banner Save-A-Lot will be the most significant catalyst for growth going forward; Supervalu aggressively is addressing pricing issues that have had consumers who are more accustomed to the “hi” in the grocer’s "hi-lo" pricing strategy shopping elsewhere; and while traditional Supervalu banners Acme, Shaw’s and even Jewel-Osco do not have a “For Sale” sign on their respective front lawns, at least not yet, they can be had for the right price.

However, following Supervalu’s disappointing fiscal 2011 third-quarter results and a second consecutive quarter announcing reduced full-year projections, the question many analysts seemed to be posing was not what if Supervalu begins parceling out its numerous grocery banners, but how soon?

“We do not feel stressed that we have to do anything [with regard to divesting assets],” Craig Herkert, Supervalu CEO and president, assured analysts Tuesday morning. That’s not to say Supervalu won’t entertain offers, though. “We will always look at our asset base and make appropriate decisions for our shareholders,” Herkert said.

But today’s market is a buyer’s market he added, suggesting that Supervalu is not yet in a position where a divestiture has become a necessity to avoid violating any financial covenants, at least not at a reduced value. “Within each of these banners ... we have very successful stores,” Herkert said. And these banners are market-share leaders across several markets, he added.

The more immediate issue being addressed by Supervalu is its failed holiday-season promotions, particularly across carbonated beverages, soups and frozen foods, and a "hi-lo" pricing strategy that has many consumers cherry picking promotional deals but satisfying their day-to-day shopping needs elsewhere. “If three weeks out of four [our pricing is] out of line with what the market is, she’ll split her basket and get those products somewhere else,” Herkert said. “What we are trying to do is minimize that delta we have between our regular price [and promotional] price,” he said, and potentially recapture some of those lost baskets.

Repairing consumer perception that Supervalu banners are overpriced (save for Save-A-Lot) is not going to be easy, especially in the near term. Consumers still are struggling in a difficult economic environment, and supplier prices next year are expected to increase between 3% and 4% on the low end to as high as 14% on the high end, Herkert said. “We are passing these [price increases] along to our consumers,” he acknowledged.

Another challenge in repairing any pricing gap is doing so without impacting EBITDA. However, Herkert maintained that when done right, lowered everyday retail prices do not necessarily mean a reduction in profit on the item level. Price corrections could increase turns, for example. “As we get those prices in line ... we do see that [the consumer is] willing to buy that product from us on a regular basis,” he said.

However, in spite of the poor performance, Supervalu’s deep discount banner Save-A-Lot has proved promising, Herkert reported, and will benefit from the lion’s share of some $700 million in capital investments in fiscal 2012. “For our traditional banners, capital spending will go toward investments in technology to support our business transformation and store remodels,” Herkert said.

Another promising development associated with Save-A-Lot is the alignment with Rite Aid across several South Carolina locations. “This is a promising relationship for us,” Herkert said, that exposes Save-A-Lot to some prime retail locations and expands the banner’s demographic reach. The Texas Save-A-Lot co-branded stores targeting Hispanic shoppers — El Ahorro Save-A-Lot — also are performing well, Herkert said.

Save-A-Lot’s footprint has grown by 8.5% sq. ft. in the past four quarters and currently stands at 1,236 stores. The deep discounter carries more than 1,800 SKUs and represents a “full shop” Herkert said, as compared with the fill-in trips to convenience stores and the treasure-hunt opportunities available at dollar stores. Private-label penetration at these stores is as high as 60%. Those consumers receiving Electronic Benefit Transfers represent 40% of all transactions, up from 27% two years ago.

Following the call, Supervalu stock dropped to $7.54 in mid-morning trading from the closing price of $8.59 on Monday. Supervalu reported adjusted net earnings of 24 cents per diluted share, falling well short of analyst consensus expectations of 32 cents. Net sales for the third quarter ended Dec. 4, 2010, dropped 2.3% to $8.7 billion. Supervalu lowered its full-year guidance to a diluted net loss in fiscal 2011 ranging between $7.19 and $7.09 per share from previous guidance of a diluted net loss ranging between $5.94 and $5.74 per share.